Background

On October 13, 2021, the Federal Trade Commission (FTC) sent a Notice of Penalty Offenses to more than 700 businesses, including top consumer brands, retailers, e-commerce platforms and advertising agencies, regarding practices involving customer endorsements, testimonials, reviews, influencer marketing and native advertising that it considers to be deceptive. The Notice did not allege that any of the recipients had engaged in wrongdoing. Instead, its purpose is to establish a basis for the FTC to seek penalties if the recipients are found to have engaged in these allegedly deceptive practices after receiving it.

The FTC’s rules require that all endorsements and testimonials reflect the actual experiences of the endorser. The rules also require marketers and their partners to disclose any material connections between an endorser and the marketer, so that consumers can rely on accurate reviews and other testimonials, and easily differentiate between paid advertisements and other statements made in exchange for a benefit provided by the company, and organic statements or reviews made by individuals.

The FTC issued updated guidelines on endorsements and testimonials in 2009 and additional native advertising guidance in 2015 to address social media influencers and advertising on social platforms where it may be difficult to distinguish advertising content from editorial content, and authentic reviews or endorsements from paid reviews or paid endorsements. The FTC has since brought numerous enforcement actions against advertising agencies, brands, game companies, game networks, and even influencers and talent who have flouted the guidelines.

The recent warning to top brands, social or other e-commerce platforms and agencies is the latest warning shot by the regulators who warned individual talent and influencers of these guidelines in 2017. Such notices are usually followed by one or more enforcement actions, which may now include monetary penalties.

The FTC’s focus in this latest warning is on the regulatory requirement that all endorsements and reviews must be accurate when made by the endorser and continue to be the honest and genuine experience the endorser had with the marketer’s product, whether such endorser is paid or not. Where an endorser is “paid,” the FTC’s guidelines require a clear and conspicuous disclosure (such as “paid testimonial,” or in the influencer context a disclosure made by the influencer on social media such as “#ad,” “#paid,” or “#brand name ambassador”). One important consideration for marketers to understand is that “paid” can mean many different things, including that the endorser was given a free product to try, was paid cash, equity or other financial consideration, or is an employee, contractor, investor or other agent of the marketer.

The FTC has in a number of its enforcement cases, including actions against Lord & Taylor and Warner Brothers, focused on the brand or marketer itself, who the FTC notes has control over the various participants in a marketing campaign and is therefore primarily responsible to ensure that reviews and endorsements of their products are authentic and disclosures are being made by the various influencers or other participants in the marketing campaign. The FTC has specifically required marketers to not only ensure that influencers or other paid endorsers are contractually required to make disclosures, but also to reasonably monitor that disclosures are being made in a clear and conspicuous manner, and terminate non-compliant influencers or endorsers. The marketer or platform is also responsible where practicable to remove fake or inaccurate reviews from their owned and operated channels, and ensure if the marketer is promoting a review, including boosting a social post via paid media, that the product or service is consistent with the claims or experiences of the endorser and accurate as to the attributes of the product or service itself.

Companies, whether or not they received the Notice, should see these letters as a warning to review their marketing activities and implement practices that are compliant with FTC rules on endorsements and testimonials. This is especially important given that FTC penalties for violation of its rules regarding unfair or deceptive advertising can be up to $43,792 per violation. Multiplied by each non-compliant testimonial, Instagram post or native blog post, this penalty can quickly become very significant and a major risk to businesses.

Key Recommendations

In light of this warning shot from the FTC, what should businesses who use influencers or who solicit customer endorsements, case studies, or testimonials do now? At a minimum, they should do the following:

• Understand how they are sourcing and using third-party content, including reviews, to market their brand. Companies should identify the participants in their marketing ecosystem that may be working with them, including agencies, publishers and influencer partners, and understand their respective practices around endorsement and testimonial marketing.
• Work with their marketing teams to create a standard set of advertising disclosures and marketing agreements and policies for third-party partners, such as influencers.
• Review their terms of service to ensure that they properly address endorsement and testimonial marketing to their customers or consumers.
• Review internal social media policies and practices to ensure employees and other contractors or agents are compliant with the FTC guidelines.
• Enact a process to monitor compliance (or outsource monitoring) and terminate non-compliant partners.

Conclusion

Digital marketing often moves at a breakneck pace, yet transparency is ever more critical both to regulators and consumers. Once companies better understand how they are engaging third parties to market their products and services, it is important for the marketing, business and legal teams to work together to develop a process to ensure compliant marketing practices, including disclosures that are FTC compliant, and marketing agreements and operational practices that appropriately protect the business.

The FTC’s rules regarding endorsement and testimonials cover a wide range of marketing activities and include detailed guidance, including when appropriate disclosure is required. The Notice reinforces the fact that the FTC continues to actively enforce non-compliance. We recommend visiting the FTC’s online “Business Center,” a helpful resource for businesses to understand these rules without a legal background. The FTC also developed a very helpful FAQ as a resource and has issued disclosure guidelines on how to make clear and conspicuous disclosures.